Fixing YRC … and LTL too

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Unconventional wisdom suggests that the road to improving LTL carrier profits begins by embracing the current economy and not competing against it.” –Doug Sartain, president, Shipmate Logistics

We all know that 2009 was probably one of the worst years ever in the history of the trucking industry and the difficulties are not over; not by a long shot. LTL carriers, as a group, though, continue to take a pretty nasty knock from the upheavals within the freight market – engendered in no small part by the ongoing troubles of YRC Worldwide.

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The outlook for YRC and its LTL brethren in 2010 is none too positive at this point either, according to a recent analysis by the very sharp Jon Langenfeld, transportation and logistics analyst with investment firm Robert W. Baird & Co. The LTL environment deteriorated throughout 2009, he said, particularly from a pricing standpoint as LTL carriers aggressively reduced rates in an effort to preserve market share.

As a result, LTL trends in the second half of 2009, according to Langenfeld’s research, contradicted nearly every other domestic freight mode, which saw pricing fundamentals bottom out and freight demand start to improve. As a result, he thinks LTL carrier profitability will be severely pressured into the first half of 2010.

A lot of that pressure, in Langenfeld’s view, is being generated by YRC as the carrier continues to struggle with debt and operating losses. “The health of the LTL environment in 2010 is largely dependent upon the outcome of YRC’s attempted capital restructuring,” he noted in a recent research report. “The successful debt-for-equity swap at the end of 2009 – removing $470 million of debt from the balance sheet, lowering interest payments, and provided incremental access to capital – surprised investors, but much heavy lifting still remains. Most notably, the company needs to address its ongoing operating losses, cash burn and share loss.”

In his view, If YRC remains viable through 2010, the LTL pricing environment will be impaired through given the 20% to 25% worth of excess capacity within this segment of the trucking industry right now. “YRC still has roughly 15% of total LTL capacity and its ability to remain a going concern will limit industry pricing growth, which will limit peak margin potential for other LTLs,” Langenfeld said.

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“However, if YRC were to cease operations, the impact would be a significant positive to LTL industry pricing,” he noted. “We would expect LTL rates to rise 5% to 10% for the 12 months following such an event, and peak margins during the next cycle could meet or exceed previous peak margins for the other LTLs.”

That’s a pretty gruesome recipe for improved LTL industry help – cannibalizing one carrier to the betterment of the others. That being said, Langenfeld said YRC appears to possess enough liquidity to remain in operations into early 2010, though key operational issues of share and operating losses will remain a significant challenge. Unprecedented leniency among key stakeholders, including banks, labor unions, and – yes – the federal government could provide further support for YRC to remain a going concern through early 2010, Langenfeld believes.

OK – that’s a tough outlook if you ask me. But the deeper question is this: Can YRC be fixed and, by extension, the LTL segment of the industry restored to health without its demise?

Doug Sartain, president of Cleveland, OH-based Shipmate Logistics and an LTL carrier veteran thinks that’s more than possible if the right approach is taken. And remember, too, while this might be a “paper exercise” as the axiom goes, there’s a lot at stake where YRC is concerned – especially for the 59,000 people it employs.

Sartain, whose trucking career included stints at Pitt Ohio Express, Ward Trucking and the now-defunct Jevic Transportation, told me that the future of LTL is with strong regional carriers that form national alliances with other strong regional carriers. This type of arrangement, versus the big “national carrier” model,” is where success lies in his analysis.

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“That’s because you provide a ‘national sell’ to the customer without the ‘national’ cost structure needed to service the shipments moving through the system,” Sartain (seen here at right) explained to me.

“The independent regional infrastructure business model is much more cost effective for a national sell because they only incur the cost associated with each shipment in their footprint,” Sartain said. “Their fixed costs are non-existent or become transferred to their partner carrier once the shipment moves out of their regional footprint. As a result, this model creates additional revenue opportunities and increases lane density.”

A big reason for this change is that shippers and manufacturers are shifting plants and distribution centers closer to their end users. “They have looked to cut their transportation costs internally and one way has been to reduce the freight miles,” he noted. “Consignees are also buying their products closer to their operations in an effort to reduce their transportation budgets.”

As a result, statistics show that today, 70% of the LTL freight market moves within a 550 mile trip. “This supports a regional carrier business model versus a national carrier model,” Sartain said.

As quoted in a story earlier this week about YRC on our web site, Sartain pointed out that freight rates have been slashed so much in the LTL arena that in order to cut fixed and variable expenses as a percent of revenue, carriers must fill each trailer full to capacity per trip with revenue paying shipments. Yet the more terminals a carrier has, the harder it is to fill every trailer to capacity on every trip, he said – precisely the problem faced by YRC’s mammoth operation, with 430 terminals, 61,411 trailers, and 15,468 tractors at last count.

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This is something borne out by the numbers. According to Baird’s research, while freight rates were down 5% on average for truckload carriers in 2009, they plummeted 10% for LTL operators. The investment firm also predicts LTL’s rates will be slower to recover this year, staying flat or inkling up at most 2%, compared to a 1% to 3% climb for their truckload brethren.

“By now, most traditional cost-cutting strategies such as lay-offs, reduced fixed costs, deadlined equipment and wage reductions have been initiated,” said Sartain. “Sales rate increases have been tried as well as offering deeper discounts in an effort to bolster market share and top line revenues. Although these tactics have proven to be effective in prior years, they are no longer enough to sustain profitability in our present market conditions.”

What to do then? Sartain breaks down his strategy this way:

Restructure P&D: avoid the traditional circuitous core zone routes used in pickup and delivery (P&D) or “peddle” runs and replace them with straight line peddle runs traveling primary routes. This strategy decreases back-tracking miles, reduces multiple peddle drivers crossing each other’s paths and eliminates a number of routes and drivers close to the terminal. Thus, less miles equals less labor, less fuel, and less maintenance; the three largest variable expenses for any trucking carrier.

Change equipment and labor: When applicable, use straight trucks instead of tractors and trailers to reduce Class A wages, maintenance, fuel, registration and new equipment expenses. Use part time labor for P&D and dock work to reduce per hour wages, health care costs and paid time off.

Reorganize operations: Look for pool distribution, local shipment, same-day delivery and multiple shipment pick-up opportunities. These irregular revenue streams can eliminate one or more of the internal purchased transportation costs if integrated properly into an LTL operation. In addition, target expedited and volume LTL shipments that commingle with standard P&D and linehaul operations to reduce capacity issues and improve revenue/mile. “LTL carriers are beginning to accept non-traditional LTL (volume shipments 10,000 to 20,000 pounds) to increase their lane density for both the linehaul and peddle route operations," he said. "The goal is to improve equipment capacity and drive down the fixed and variable expenses found on their P&L."

Go “Kaizen”: Avoid the typical American business goal of a general 10% improvement. Instead, isolate each line item on your monthly profit and loss (P&L) statement and then drill down to smallest detail to determine what drives each cost factor. Then strive for a 2% to 5% continuous improvement for each independent line item. Design financial and operating dashboard metrics that align with profit objectives and then apply a “Kaizen” strategy for improvement. “Kaizen,” by the way, is a Japanese management concept that emphasizes on process, complemented with management acknowledgement that contrasts with the results-oriented management ingrained in western thinking. Most Kaizen focus is on implementation and, if done right, the net result will likely be a 10% or more profit and efficiency improvement, said Sartain.

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“Carriers need to first truly understand their costs – and I mean intimately know every dollar spent,” he stressed. “They should look to cut out any expense that does not add value to the customer or the company. Then the carrier must improve efficiencies in every area of the business. By taking a ‘do more with less’ approach they will reduce their operations to a solid foundation. Once this is done, it will become obvious on what needs to be further eliminated from that point on to make a profit. The key is to cut local P&D miles and reduce the number of linehaul trip miles.”

For YRC directly, Sartain noted a lot must be done quickly:

• Apply a Lean Manufacturing approach by eliminating costs that do not add value to the customer or to the carrier

• Cut discretionary spending

• Reduce P&D and linehaul miles by at least 10%

• Eliminate the “core zone” P&D model and use a “primary route” model for the local P&D operation

• Focus on cutting out one of the four internal purchased transportation costs (pick-up, delivery, dock & linehaul) when securing revenue shipments.

• Cut top heavy wages throughout the company

• Look to eliminate terminals that cannot support their own cost structure

• Consider fewer terminals by merging multiple operations

• Take under-utilized office or supervision employees and have them sell around the terminal to increase their employee contribution and add market share without adding more Human Resource expenses.

• Use cheaper equipment options such as straight trucks instead of 48-foot tractor trailers in low density local peddle areas

• Reduce the number of tow motors and use pallet jacks when applicable

• Look to use the tractors more hours per 24 hour day by having the tractor shared by the local P&D driver and a linehaul driver who will return to the same terminal before the next day’s peddle operation.

Of course, we’re also talking the elimination of some full-time jobs here – certainly something no one wants to contemplate in these tough times. But Sartain puts this issue in pretty understandable – if stark – terms when it comes to big players like YRC: “The question is, would you rather reduce employment or just watch 59,000 jobs disappear altogether?”

Indeed, that will probably be the toughest challenge facing YRC in the months ahead.

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